The Asian credit space endured yet another uninspiring session as investors continue to contend with: (i) further rating downgrades in China, as well as (ii) concerns over inflation and slowing growth across the broader market. On a week-on-week basis, credit spreads for Asian IG widened by 3 bps (to +155 bps) while the HY segment widened by as much as 128 bps (to +1,195 bps).
Fund flows continue to be lacklustre in the week, with emerging markets posting a net outflow of US$2.2 billion cross both hard currency and local currency bond funds. Asia, excluding Japan, contributed US$226.0 million to the total outflow, marking the region’s 11th consecutive week of outflow.
Sentiment for the Chinese property sector were further bogged down in the week following news of Country Garden’s rating downgrade; effectively losing its IG status and currently treading in HY territory. Moody’s downgraded the company’s rating to Ba1 last week whilst maintaining its negative outlook, citing declining property sales, and deteriorating financial metrics amidst the current challenging backdrop. Currently, both Moody’s and S&P has Country Garden rated as a HY issuer, while Fitch continues to have Country Garden on within IG ratings at BBB- with a negative outlook.
Following the rating action, Country Garden’s bonds fell by 2 to 4 points across the curve to trade around the 40.0-50.0 cent levels to the dollar. The news also affected other property names, including quality ones such as CIFI and Yanlord among others, which were down by up to a point last week.
Elsewhere, Foshan International – a Chinese conglomerate with major interest in finance, tourism, and pharmaceutical – was also in focus last week after Moody’s placed their Ba3 credit rating on review for downgrade. This further exacerbated the sell off within the HY space amid concerns over the company’s ability to refinance as well as the contagion effect stemming from China’s property woes. According to reports, Foshan has a combined US$2.9 billion worth of onshore and offshore debts that are due in 2022.
While Foshan has offered to buy back some of their dollar and euro bonds at par value, it did little to reignite confidence as the company’s bonds fell by as much as 20 to 30 points across the curve last week. We currently do not have any exposure to this name.
On portfolio action, we participated in a few IG-rated issuances in the primary market, namely from GS Caltex as well as an SGD Tier 2 bond by HSBC. In addition, we also added Parkway Pantai PERP that is callable in July 2022, and USD AT1 by DBS Bank for some of our regional portfolios. Our defensive stance remains largely unchanged at this juncture, and we intend to stay prudent in terms of our credit selections.
Back home, local government bonds enjoyed better buying support in the week following the rally seen in US treasuries alongside global rates. MGS yields edged lower by some 10 to 21 bps across the curve, where the bulk of flows were concentrated on papers of medium tenure. The 20-year MGS ended the week 21 bps lower to 4.64% as the notable outperformer, while the 3- and 10-year benchmarks also trended lower to 3.49% and 4.21% (from 3.59% and 4.34% in the previous week) respectively as of Friday’s close.
On primary news flow, markets were introduced to a 5-year GII auction of RM4.5 billion in size last week, in which the issuance a strong bid-to-cover ratio of 3.1x mainly driven by participation from banks. The issuance recorded an average yield of 4.16% before closing Friday at 4.06% in secondary trading. The next government bond auction would be the 30-year MGS reopening this week. The issuance size is estimated to be around RM4.0 billion, including private placement.
The PDS segment also saw a few notable primary rollouts last week, including:
- Perusahaan Otomobil Nasional (“PROTON”) – issued RM700.0 million in Sukuk across 5- and 7-year tranches at 4.99% and 5.31% respectively, which is some 100 bps above their respective MGS benchmarks.
- Danum Capital – Khazanah Nasional’s special purpose vehicle (“SPV”) issued RM2.0 billion worth of bonds via its 3- and 7-year offering. The bonds were priced at 4.02% and 4.68% respectively.
- Tenaga Nasional Berhad (“TNB”) – issued RM4.0 billion worth of bonds across multiple tranches ranging across 7- to 20-year tenures.
In other news, Malaysia’s Consumer Price Index (“CPI”) rose 2.8% year-on-year for the month of May, surpassing initial estimates of 2.6% as well as April’s reading of 2.3%. Food prices – which accounts for some 30.0% of CPI components – rose to 5.2%, the highest since November 2011; while transport prices also jumped by 3.9% from a year ago.
Bank Negara Malaysia (“BNM”) has maintained its CPI guidance of 2.2 to 3.2% for the full year of 2022. Though given persistent inflationary pressure, we expect CPI reading to hover nearer to the top range of the central bank’s forecast. With this, BNM is also likely to step up its policy normalisation efforts in its upcoming meetings, where markets are currently expecting a cumulative interest rate increment of 50 bps for 2H2022. We will continue to keep a close watch on further developments on this front.
In terms of portfolio action, we took the opportunity to participate in a few of the primary issuances aforementioned – namely from Danum Capital and TNB – for some of our domestic fund. Cash level currently ranges around 4.0-12.0% depending on portfolios.